22/9/15: Ireland: a land of un-remarkable savers

Remember the persistent whinging about 'high savings rates' in Ireland. And recall all the talk about how these savings are allegedly killing of domestic demand (because, of course, the 'recovery' has been supporting that demand, so if only the bad households stopped squirrelling away stashes of cash... then).

Ok, it always smelled like a rat, primarily because the alleged savings were not translating into household deposits. But, hey, the story rolled on for years...

So here is a neat EU Commission report on savings across the EU. And here is the top-line chart:

The chart above tells us two things about Irish savings:

1. Our savings rate was pretty darn low - fourteenth from the top in the EU - back in 2012.
2. Our savings rate was pretty darn low over 1995-2012 horizon - fourteenth from the top in the EU.

In fact, as the chart above illustrates, instead of jumping up in 2012 compared to 1995-2012 average, our rate stayed on average. Bang on it (we are on a red line).

Worse, adjusting for pensions, our savings rate is also remarkably poor - ranked 12th highest in the EU per following chart:

And our social services (pretty wide-ranging for some key demographics of dis-savers and very narrow for the demographic of savers) have little effect on our savings rate - net of social services, our saving rate ranks 15th (as opposed to 14th) from the top:

Of course, savings rates can be calculated differently across economies, so EU report distinguishes two sources of financial savings (savings used to purchase financial assets) and non-financial savings (savings used to purchase homes, gold etc). So may be, just may be the 'high rate of savings' was down to the latter (remember, Irish households were trying to repay their home mortgages as fast as possible)?

Nope, not that either. Per chart above, we rank 11th in the EU in terms of our financial savings rate and 19th in terms of non-financial savings.

So what on earth was that 'high savings' story about? A business lobby-invented scheme to get the state to 'nudge' savings out of the banks and into spending? A state-concocted dream to justify potential (and in some cases actual, e.g. pensions levy and property tax) introduction of taxes on assets? A glitch in data caused by mortgages close-offs due to sales to unregulated foreign entities and to writedowns on banks balancesheets? Precuationary savings that went to fund relocation of younger adults abroad? Or a compensation in the accounts by increased financial (cash) savings offsetting somewhat decline in the values of non-financial savings (house prices tanking)? Or all of the above?

One way or the other, Ireland is clearly not a nation of savers nor are we a nation of spenders. We are, remarkably unremarkably mid-of-the-road type...

28/7/2014: Of Savings, Cash and Hedge Funds...

The current crisis, on monetary aggregates side, can be characterised by the rising prevalence of cash over savings. In other words: shrinking stock of credit and deposits relative to cash.

The current crisis, on media commentary side, can be characterised by the endless talk about high savings rates in the private sector.

Here is the problem: savings = inflows into stock of savings (aka, deposits) or investment or divestment out of loans (including forced restructurings, bankruptcies, insolvencies and foreclosures). We know that Irish investment is not growing at the rates worth even mentioning. Which means that Either deposits should be growing to reflect 'high savings' or debt should be shrinking.

Take a look at the difference between M3 money supply and M1 money supply.

By definition:

• "Money Supply (M1) to euro area -M1 is the sum of overnight deposits and currency issued (this comprises the Central Bank's share of euro banknotes issued in the Eurosystem, in proportion to its paid-up shares in the capital of the ECB, plus coin issued by the Bank less holdings of issued euro banknotes and coin by the MFI sector). " 
• "Money Supply (M2) to the euro area -M2 is the sum of M1 plus deposits (with agreed maturity of up to 2 years; redeemable at notice of up to 3 months and Post Office savings bank deposits)."
• M3 is M2 plus deposits with maturity over 2 years.

So the gap between M1 and M3 is deposits.

The M3-M1 gap has fallen since the onset of the crisis. It has fallen along the steady trend line, with some volatility around the dates of banks recapitalisations. And it continues to fall. In fact, between December 2013 and May 2014 we have the longest uninterrupted decline in deposits in history of the series. Current level of the gap is sitting only EUR7 billion above the all-time historical record low. In fact, during this 'historically high savings rates' period, Irish monetary system has managed to reduce the stock of deposits, compared to pre-crisis levels, by EUR85.91 billion.

But while savings (deposits) are falling, 'savings' (debt deleveraging) is all the rage:

You can see what has been happening in the Money Supply territory and private credit here:

With all of these 'high savings' promoted by the official statistics and 'new lending' promoted by the Banking Federation, the Central Bank is now officially giving up on getting those 'repaired and recapitlaised banks' to lend into the real economy (something they were supposed to do since early 2009 - based on the promise of the October 2008 Guarantee, then since early 2010 - based on the various Government programmes, then since first half 2011 - based on the banks recaps and PCARs, then since 2012, based on Government programme agreed with the Troika, then since early 2013, based on Government spin of a turnaround in the economy...). Instead of hoping for the Pillar Banking System to miraculously come back to life, the Central Bank is opening up the floodgates for the hedge funds (here courtesy of fire sales of assets by Nama) to lend into economy, despite the fact that such lending is considered to be a high-risk activity. Nothing like selling pennies on the euro and then celebrating euros on pennies debt reload...

14/1/2013: Irish Savings Rates - Q3 2012

Data for Irish Savings rates for Q3 2012 has been released by the CSO (see release here). Instead of rephrasing the release, lets take a look at the underlying data (link to data is provided on page 1 of the release).

First off: household savings and consumption expenditures, seasonally-adjusted:

Per chart above (all in current market prices, so no inflation adjustment, but seasonally-adjusted)

• Disposable income rose in Q3 2012 to EUR23,002 million - up EUR486mln (+2.16%) q/q after expanding EUR385mln (+1.74%) in Q2 2012. This is good news. Year-on-year, income is up EUR1,158mln (+5.30%) and this follows up on EUR823mln increase y/y in Q2 2012 (+3.79%).
• Historical comparatives for total disposable income are also looking good. Average income since Q1 2008 was EUR22,984mln, so we are close to that in the latest figures. We are also ahead 2010 average (EUR22,198mln), 2011 average (EUR21,693mln), but below 2008 average (EUR25,061mln) and 2009 average (EUR23,310mln).
• Final consumption expenditure in Q3 2012 stood at EUR19,319mln up EUR64mln (+0.33%) q/q partially reversing decline of -EUR77mln (-0.40%) q/q in Q2 2012. Year-on-year, consumption spending was up EUR217mln in Q3 2012 (+1.14%) after posting a y/y decline of -EUR165mln (-0.85%) in Q2 2012.
• In longer range averages terms, latest consumption reading is just about at the average level for 2012 (EUR19,302mln), slightly below 2011 average of EUR19,362, and below 2008 average (EUR22,264mln), 2009 average (EUR19,836mln) and 2010 average (EUR19,532mln).
• Gross household savings stood at EUR3,684mln in Q3 2012, up EUR423mln (+12.97%) q/q and this follows EUR463mln rise (+16.55%) in Q2 2012. Year-on-year, household savings rose EUR942mln (+34.35%) in Q3 2012 after posting a EUR988mln (+43.47%) y/y rise in Q2 2012/
• So far, Q1-Q3 2012 average savings run at EUR3,248mln - ahead of all annual averages, save for 2009 when they reached EUR3,475mln.

Saving ratios:

• As the result of the above, the household savings ratio (ratio of gross savings to total disposable income) rose from 14.48% in Q2 2012 to 16.02% in Q3 2012. This represents an increase of 1.53ppt q/q (following a 1.84% rise q/q in Q2) and a y/y rise of 3.46ppt (down from the y/y rise of 4.00% in Q2 2012).
• Longer-term comparatives suggest the return of strong precautionary savings motive (as shown in the chart below). More specifically, adjusting for growth variation in Irish GDP, longer-term savings ratio consistent with economic recovery for Ireland should be in the range of 8.6-11.9%. We are now well above that range. More significantly, even taking shorter period deleveraging pressures in 2008-present crisis, the savings ratio averages at around 14.10%, lower than the current 16.02%. 2012 average savings ratio through Q3 is 14.38% against 2008-2011 average of 11.9%. By all metrics, Q3 2012 looks like a return of the precautionary savings motive for households.

However attractive it might appear to make an argument that savings ratio is too high amongst Irish households, one must consider the fact that our households are:

1. Under immense pressures to deleverage out of extremely high debt ratios (an objective consistent with banks stabilisation objective of the Government and with Troika concerns about debt levels, as well as with the goal of restarting household investment cycle)
2. Household savings = banks deposits and I doubt there is out there a single Irish politician brave enough to suggest we need less of the latter
3. Current act as the main driver for supporting gross national savings from complete and total collapse. Do recall that national savings = national (domestic) investment (ex-FDI). And do recall that in Ireland, SMEs are funded by domestic savings (at least equity, non-debt funding component). Which means that were we to have meaningful investment activity here, we need to encourage and support, not discourage and tax, savings.

On this note, let's take a look at seasonally unadjusted data for aggregate savings in the economy:

The chart above shows clearly that:

• Total savings in the economy declined to EUR7,320mln in Q3 2012 (down EUR559mln or 7.09%) q/q, but rose EUR1,747mln (+31.35%) y/y. In Q2 2012 there was an annual rise of 28.71% or +EUR2,199mln.
• Excluding financial corporations, the real economy's savings fell EUR452mln (-8.05%) q/q in Q3 2012, but a re currently up EUR1,851mln (+55.84%) y/y, against Q2 2012 annual rise of EUR910mln (+19.3%).
• The chart above shows that once we exclude financial corporations, savings actually are running much closer to long-term trend and that the trend is moving up, toward rising savings once again. This upward trend was established around Q1-Q2 2011 and as we shall see shortly is not necessarily signalling a major departure from the long-term established trends (se chart below).

The decomposition of savings into sectors shows that:

• Household savings rose modestly q/q in Q3 2012 (absent seasonal adjustment) and are up significantly y/y (+26.6% in Q3 2012), although that rise was well-matched by 26.0% increase in Q2 2012.
• General Government continued to dis-save (accumulate debt) in Q3 2012, shrinking national savings by EUR2,331mln (more than 9 times the rate of dissaving, as the rate of saving in the households). Year on year, the Government has managed to post EUR423 increase in dissaving (+17.2%).
• Financial Corporations also showed dis-saving in Q3 2012 or EUR107mln compared to Q2 2012 and EUR104mln (4.6%) compared to Q3 2011.
• Non-Financial Corporations posted savings of EUR4,930mln in Q3 2012, up EUR1,606mln (+48.3%) on Q2 2012 and up EUR1,215mln (+32.7%) on Q3 2011. 
• Thus, savings increase in Non-Financial Corporations outpaced savings increase amongst the Households by the factor of almost 6 in quarterly terms and by 1.2 in annual terms. If the Irish Government (and some analysts) are concerned with high savings rates, they are better off targeting companies accounts not household ones. But I doubt they are likely to start calling for a savings tax on MNCs.

Two charts below show long-term trends in savings components by sector. I reproduce two charts to show best-fit models and comparable models.

The charts above very clearly show that since about mid-2005, long term trend in Government savings diverged from those for Non-Financial Corporations and Households. Specifically, National savings became positively dependent on Households and real Companies and negatively impacted by the Government. In other words, current high Household savings rates are a saving grace for the economy that suffers from extreme pressures of Government deleveraging.

The third chart above clearly shows that Households contribution to total savings in the economy counter-moved with Government contributions, supporting the overall savings activity. In fact, correlation between Government savings and Household Savings averaged remarkable -0.91 in the period 2002-present and statistically-indistinguishable -0.89 since Q3 2006 through present. Over the same period of time, correlation between Government savings and Non-Financial Corporations savings runs at slightly lower -0.88 historically and -0.86 since Q3 2006.

12/10/2012: Irish Savings Myths

Last night at the Dublin Chamber dinner, Taoiseach Enda Kenny made a rather common, but egregious in its nature statement that Ireland has the highest savings rate in the OECD at 12% GDP. Speaking before him, the President of the Dublin Chamber, Patrick Coveney, made a similar statement, but referenced 14% savings rate. Both speakers were identifying a high savings rate as being an impediment to consumer spending and recovery.

In addition to the above, the Chambers President made another startling juxtaposition. In his speech he said that:

1. Savings are too high and we need to 'do something' to reduce these;
2. Investment is too low
3. In the future, investment (via bank lending) will remain low.

Let me deal first with the last set of claims. In the Irish economy, savings are used to pay down debts (thus supporting deleveraging of the households and companies, and preventing collapse of our banks) and invest in economic activity. Reducing the debt-repayment component of savings would require a default/restructuring of private debts. The remainder of our savings goes to finance investment (direct equity & direct lending to businesses) and deposits in the banks (which in turn normally finance lending). So which part of our savings would Patrick Coveney like to cut? The banks bit (precipitating collapse of the banks) or the investment bit (precipitating further decline in investment)?

I am not even going to ask Mr Coveney as to what he might suggest that the Government should do to cut our savings rate. Impose huge wealth taxes, or go straight to a large-scale expropriations of 'excessive' savings? Both will do wonders to Ireland's reputation abroad, let alone to the dynamics of future investment at home.

Instead, lets move on to the myths both speakers were keen on repeating - the myths of our allegedly massively high savings rates. All of the data below is taken from the IMF WEO database.

Let us rank Ireland's gross savings rate compared to all other advanced economies (higher rank means lower savings rate):

Contrary to what our Taoiseach and Mr Coveney were saying, Ireland's savings rate in 2010-2014 is estimated by the IMF to be... the 5th lowest in the sample of 33 advanced economies around the world. May be it is the highest in the Euro zone? Oh, no - it is actually the fourth lowest in the Euro zone.

So what about this year then? Oh, that would be exactly the same as for the 2010-2014 average:

But wait, you might say, surely we are saving as an economy more today than in the past? Oops...

As above shows, during the 1980-2011 period, average savings rate in Ireland stood at 18.63% of GDP. In 2012 it will be 10.82% of GDP. In 2011 it was 10.59%, in 2010 11.53% and so on. Not even close to the historical average! And not close to our peers all of whom have much higher rates of savings: Israel at 18.94%, Finland at 19.84%, Belgium at 21.38%, Austria at 25.23%, Netherlands and Hong Kong at 26.29%, Luxembourg at 26.57%, and so on.

And yes, Mr Coveney, savings and investment are linked in Ireland:

And the gap between savings and investment in Ireland - explained in part by the banks claims on our savings via loans repayments:

... well that gap is currently at the advanced economies average and it was below that average during the crisis so far. 

In other words, there is no 'excess' savings in Ireland. As this economy continues to struggle with the banks debts (ah, the Chambers dinner was sponsored by one of the Pillar Banks) our savings-investment gap is forecast to rise above the advanced economies average in 2013-2017. That is the illustration of the Taoiseach's famous dictum that he won't have 'defaulter' written on his forehead. So clean forehead for our Taoiseach means no investment for businesses. Simples...